How to Measure What Matters As a Small Business

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You have a steady stream of work coming into your organization but you’re still not sure if you're ready to hire.

Cash flow is low, expenses are up, and you’re not sure why.

You gave out bonuses but felt a bit uncertain while doing it.

As a business owner, situations like these can keep you awake at night.

As a service company, similar questions weighed heavily on Dan Longhouse, President of The LHT Group, an organization that creates custom eLearning courses and solutions to help companies engage and educate employees.

“Our solution was to create metrics that could tell us more about the health of our company,” says Dan. “In doing so, we solved the issue of not being able to sleep at night—because we now know more information that can help us make better business decisions.”

What Matters Most To Your Company?

Working with Aileron Business Advisor Tony Collins, Dan was able to focus on three factors that drive success at The LHT Group. “Tony asked us, ‘If you were on a remote island, what are the three things you would need to know to ensure your company is healthy?'” says Dan.

With this lens helping him narrow his focus, Dan also considered the company vision and mission, which included innovation, creativity, and a high quality of life for employees.

In the first version of his dashboard (or way of viewing metrics that matter for his business), Dan and his leadership team came up with three Key Performance Indicators:

1. Sales pipeline. Knowing the type and mix of opportunities that are in the pipeline answers the question, “What kind of sales do we have coming in?” It’s a key metric to look at because it provides information about future results and it impacts business decisions from sales to operations.

Dan looks at this metric every Monday, saying it’s an effective trigger for the company. “If the pipeline is low, then we're in a position where we can say, ‘We know we need more work, let's aggressively implement our sales and marketing campaigns,’” he explains.

2. Burn rate. Knowing the amount of capital the business is spending, and how fast they are spending it, answers the question, “From this day moving forward, if we don't receive any more work, how long will our business survive?”

Put simply, Dan is looking at his projected cash flow, and then dividing it by an average of his expenses over the last 12 months. Using the metric over time has allowed Dan to make more strategic decisions for growing and scaling the company.

It’s also an example of a metric that helps tell more of the “why”—rather than solely looking at the individual parts that make up burn rate, such as looking at cash, expenses, or outstanding invoices alone. “Additionally, knowing our burn rate allows us to be more aggressive with investing in new products and new services,” adds Dan.

3. Resource capacity. Knowing how the company is utilizing its resources answers multiple questions including, “How busy is everyone?”, “Are we stressing our capacity?” and, “Are we equipped to handle more work?”

This is a critical metric for the company to maintain its commitment to high quality service and to help them invest in innovation and creativity. “For example, if resource capacity is low and our pipeline and burn rate are high, this is an indication that it’s possibly a time to push innovation and invest in employee training and new product research and development.” (Innovation is another value of the company.)

As a virtual company, part of the resource capacity metric is shared on a weekly basis, supporting teamwork, transparency, and constructive accountability.

It also helps him feel more confident than ever when hiring a new team member. “Before we would say, ‘All of our employees seem to be maxed out, should we hire somebody?’ Now, we can say, ‘Based on our pipeline, burn rate and resource capacity, we are in a position to add another resource.’”

Would You Play a Game Without Keeping Score?

Would you play your best game if you weren't even keeping score or didn't know how much time was left on the clock? Similarly, when you gain a clearer sense of where your business is, and where it may be headed, you'll be able to respond with improved business decisions. One part of that process is about making work visible by using a systems view.

A systems view shows how the work gets done, so team members can see, share, and understand processes and what's happening in the organization. And, just as important, this framework can help team members recognize, measure, and monitor what matters most to the business. The Leading with a Systems View workshop is a 2 and a half day workshop to help you recognize significant opportunities to reduce costs, increase productivity, growth and innovation in your organization by using core concepts that come from Dr. Deming. Learn more below.

This post originally appeared on Forbes.com

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